Does Your Education Affect Your Automobile Insurance Rates
Understanding Risk Factors
Insurance companies are all about risk. They spend enormous amounts of money and effort crunching numbers and determining what factors about an individual can give them predictability on the amount and types of claims you are likely to file. The five most common risk factors are:
- Vehicle Type
- Driving Record
- Demographics (marital status, income, education, occupation)
Is your occupation, education and income relevant?
Clearly, your occupation can influence on your auto rates. Considering a traveling salesman logs more miles (risk) than a stay at home mom (though some Soccer Mom's might debate that), the insurance company expect him to file more claims. So that correlation is clear and understandable.
But are your Education and Income levels relevant or even fair? That topic has been the subject of much debate and scrutiny by insurance regulators, and a fair amount of squirming by some the largest automobile insurance providers.
Effects of Regulation by States
A search on the effect of State level regulation will lead to a mind boggling list of state by state articles showing how each state is providing oversight to make sure that insurance companies are providing fair and reasonable rates to consumers. This has been positive in the fact that the oversight has increased transparency of information released to the consumer, which in turn has driven competitive pricing and in general, better insurance products for all.
But the regulatory pressure has had some hidden effects, specifically what the insurer's call "cross subsidization". Simply put, this means insurers charge low risk policy holders more than they should, in order to hold rates down for higher risk policies. All this is done to satisfy guidelines put in place by the state, that are supposed to insure fair practices.
The State of Florida conducted an exhaustive study of this practice in 2007, revealing that many of the leading carriers appeared to be ignoring some correlative data on Education and Income and Race.
What Does My Education have to do with it?
Insurance companies manipulate reams of statistical information, to use a practice generally referred to as actuarial analysis, essentially looking at groups of statistical information to predict risk and assign premiums. Most state regulations require that insurance companies to reveal the actuarial tables that drive their premium assignments. What was revealed in the Florida Study, and replicated in other State's investigations, was that while the companies did not collect data on race, they did on education and income.
Florida proved that there was a clear correlation between Race and Income/Education levels, and made the case that insurance companies were indirectly using race as a factor, a practice that is illegal under both State and Federal guidelines. The insurance companies under investigation (GEICO was most prevalent) denied the allegations.
So What Does It Mean?
An update to the Florida study was recently completed by the Consumer Federation of America. The study examined quotes in 15 cities from the four largest auto insurers in the country - State Farm, Allstate, Progressive and GEICO. The result of the study, conducted by getting quotes for hypothetical drivers with similar profiles, revealed, among other things, that if you have a low educational attainment and/or low income, you will be charged more for insurance, even if age, vehicle and driving records are the same as someone with a higher education and income. Example:
- In Miami, an insurer quoted one person $1,759 a year and another who is similar $3,457, and the only significant differences in the profile where the education and income variables.
States discourage insurance companies from using income and education as factors in the actuarial calculations used to set premiums, but most companies either ignore the state recommendations, or use surrogate indicators like geographic demographics to achieve the same effect.
There has also been some counterpoint studies done that show that the State's regulatory efforts are having the opposite of their intended impacts. A study done in 2012 by American Institute for Chartered Property Casualty Underwriters on the impact of Massachusetts' aggressive policies indicated that state influence may actually be causing some policyholders to pay more than they should, because of cross subsidization practices to meet state guidelines.
Teens GPA Discounts
One positive aspect of education impact on auto insurance rates is for the teenage and college students. These groups have historically been viewed as high risk, resulting in higher premiums, but there is some relief. Students holding a 3.0 - 4.0 GPA, depending on the insurance carrier, will qualify for discounts as long as they hold their GPAs above the required levels.
What Should You Do?
Work the system. Automobile insurance has become one of the most competitive businesses on the web. Use the wealth of sites and information out there to find a competitive bid for your business.